F.18a STATEMENT OF Sustainable CORPORATE INTENT & Inclusive 2019 - 2021 Growth for New Zealand Diggers at work clearing a slip on the Main North Line

Front cover image: Rebecca Hauck, Rail Operator

2 | Statement of Corporate Intent 2019-2021 Contents

Who We Are and What We Do...... 5 Introduction...... 6 Nature and scope...... 8 Market Outlook and Economic Assumptions...... 8 Sector Outlook...... 9 Earthquake Recovery and ongoing resilience...... 10 Our Strategic Priorities...... 11 Sustaining a Zero Harm environment...... 11 Engaging our customers and stakeholders - customer strategy...... 13 Developing operational performance...... 14 Empowering our people...... 14 Meeting financial targets...... 14 How KiwiRail Creates Value...... 18 Aspirations and objectives...... 20 Required information...... 25 Appendix 1: Performance Measure definitions...... 28 Glossary...... 29

Statement of Corporate Intent 2019-2021 | 3 Who we are Our vertically integrated and what we do business model

We connect people and communities

32 million One million 17% We help commuters make We carry more than We enable passenger more than 32 million low- one million tourist growth of 17% in carbon journeys each year passengers each year Auckland (2016/17)

• Manage 18,000ha of land • 3,400 employees • Own more than 1,500 buildings • 76% union members • 46 years - average employee age • 3 long distance • Over $1b invested in renewal • 45% decrease in Total Recordable Injury passenger and upgrade of rail network, experiences rolling stock and property over Frequency Rate in last three years between Auckland the last five years and Greymouth • 160,000 passengers per year • 3,500 km of track • 3,090 signals operated and maintained • Stops at 23 towns • 1,500 public and cities in NZ • 6.6m sleepers, of which level crossings 48% are concrete

4 | Statement of Corporate Intent 2019-2021 We keep freight moving

18 million 16% 25% We move 18 million We carry around 16% We transport tonnes of freight of New Zealand’s total around 25% of each year freight task (tonnes-km) New Zealand’s exports

• 3 ships • 98 tunnels • 750,000 passengers • Reduce heavy • 1,322 bridges • 4,000 sailings per year vehicle impact by more than one million • 1 million net tonnes truck trips per year • 4,578 wagons of freight carried per annum • Every tonne of freight carried by rail is a 66% emissions saving over road

• 244 locomotives • Average locomotive age 30 years • 91% of all freight arrives on time

Statement of Corporate Intent 2019-2021 | 5 Introduction

For more than 150 years, rail has played With a new Government in place in 2017, a vital role as an enabler of economic and KiwiRail is set to assist new initiatives regional growth in New Zealand, connecting for regional growth and will look to the businesses, communities, importers and Government for investment to support a exporters to the world. resilient network fit for these future plans.

Rail delivers up to $1.5 billion in hidden The Government Policy Statement 2018 benefits to New Zealand each year. These are (GPS) makes provision for the improvement benefits not recognised when undertaking a of rail through new urban and interregional traditional “return on investment” analysis of commuter rail services and outlines a capital expenditure on the rail network. They include delivery investment phase out to FY26. Rail a range of positive outcomes that would not be has a prominent focus within the GPS as an possible without rail, including reduced carbon enabler of sustainable economic development, emissions, less traffic congestion, fewer road- which links New Zealand’s regions and ports to related injuries and fatalities, and reduced road export markets overseas. maintenance costs for taxpayers. KiwiRail is registered as a State-Owned In the 10 years since its creation, KiwiRail has Enterprise (SOE) and operates within the been at the helm of sustainable transportation policy and regulatory frameworks of the State- in New Zealand, providing a low-carbon Owned Enterprises Act 1986 (the Act). This alternative for freight and passengers. It has Statement of Corporate Intent (SCI) sets out grown and adapted to meet the changing the business’ objectives and performance needs of its existing and new customers, and is targets for the three years to 30 June 2021 and now perfectly placed to help drive sustainable is submitted by KiwiRail pursuant to Section 14 and inclusive growth for the country. of the Act.

Nature and scope

KiwiRail is a vertically integrated infrastructure planning, operation and maintenance, with business with above and below rail operations. a primary focus on meeting the needs of The organisation optimises rail and ferry customers. This model also reflects the fact transport, and supply chain networks for the that railways are interconnected systems, efficient movement of freight and passengers where there are benefits to the networks and within New Zealand. operations teams working closely together.

It owns and operates a national rail network Rail competes directly with road and sea that transports around 25% of New Zealand’s operators for the transport of goods around exports per annum. Each year, it enables more New Zealand. To increase its market share, than 32 million low-carbon commuter journeys KiwiRail is transitioning to a customer centric on the Auckland and Wellington Metros, operating model which uses customer insights, transports one million passengers on its world- process evaluations and technological class tourism services including its Cook Strait solutions to develop competitive opportunities ferry service, and moves around 18 million for future growth. tonnes of freight. The business is focused on providing an Like many rail networks around the world, efficient and reliable service to customers, KiwiRail operates an integrated model with a Zero Harm workplace for its people, and responsibility for both the above rail operations helping to grow New Zealand sustainably. and the below rail network. This approach However, these aspirations are impacted by is consistent with the majority of freight rail KiwiRail’s current funding model and years of organisations and many metro train operations underinvestment by successive Governments. globally, which operate as interconnected To ensure customers receive more reliable vertically integrated businesses. services with greater capacity and resilience, and to maintain safety standards across the The integrated model is designed to facilitate network, KiwiRail requires a multi-year funding an efficient, co-ordinated approach to design, model with appropriate capital investment.

6 | Statement of Corporate Intent 2019-2021 Market Outlook and Economic Assumptions

KiwiRail plays an integral role in New of 2.9% per year over the next five years1. An Zealand’s economy, with exports accounting increasing population, low interest rates and for approximately 30% of Gross Domestic government spending underpin this growth. Product. Each year, KiwiRail transports around Treasury has forecast export volume growth 18 million tonnes of freight on its rail services will strengthen over the next year and the and carries up to $20 billion worth of freight unemployment rate will decline to around 4.0%2 value on Interislander ferries, for export or distribution around New Zealand. New Zealand’s commitment to the Comprehensive and Progressive Trans-Pacific Around a quarter of KiwiRail’s revenue comes Partnership (CPTPP) is predicted to create from the transportation of freight to and from export opportunities in Japan, Canada, Peru the international market. As a result, KiwiRail and Mexico, countries which do not have has significant exposure to the risks and free-trade agreements with New Zealand. uncertainties of the global economy. Global The agreement will see the reduction and demand for key commodities has risen in removal of tariffs over a 16-year period, and recent years resulting in growth in bulk freight, will eventually eliminate tariffs placed on forestry, and shifting imports and exports to wine and forestry products, and significantly and from ports. reduce tariffs on dairy exports. CPTTP has the potential to deliver an estimated $222 million of New Zealand’s economy is performing well tariff savings per annum3. and is expected to expand at an average rate

Total External Revenue by Service Line Freight Trading Revenue by Sector

8% 8% 15% 15% Bulk Freight IMEX Tourism 14% 16% Domestic 68% Property 36% Forestry Infrastructure & Asset Management 20% Interislander

The charts above show the source of KiwiRail’s revenue FY17, and a breakdown of KiwiRail’s freight revenue by sector. In terms of freight revenue, it is worth noting that the non-commodity driven activities are where we can have the greatest degree of influence on our market share as these activities are less susceptible to price movements caused by external factors.

Sector outlook New Zealand’s mining sector has spent many years in decline. However, there are indications Future performance of the rail freight business the coal market is experiencing a resurgence is largely dependent on the outlook for as commodity prices for coking coal, needed commodity-driven activities, the success in the steel manufacturing process, rise. There of customers’ operations and reconnecting is also strong demand for coal from emerging volumes at full capacity on the Main North Line economies such as India. (MNL), following the Kaikoura earthquake in November 2016. However, the global trend for “cleaner” energy, and subsequent investment, is predicted to

1. http://www.treasury.govt.nz/budget/forecasts/hyefu2017/005.htm 2. http://www.treasury.govt.nz/budget/forecasts/hyefu2017/005.htm 3. https://www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade-agreements-concluded-but-not-in-force/cptpp/cptpp-overview/

Statement of Corporate Intent 2019-2021 | 7 reduce reliance on coal in the long term. In business for KiwiRail. Production volumes are 2015, total investment in renewable power and projected to increase substantially in the next fuels in developing countries exceeded that 15 years as forests planted in recent decades in developed economies for the first time4. In reach maturity. The resulting “wall of wood” addition BP’s Energy Outlook for 2017 forecast should reach peak harvest by 2032. that global coal demand would peak in the 2020s5. Shipping lines continue to consolidate and invest in larger vessels. New Zealand’s ports Currently, markets where dairy consumption are responding to this trend by investing is growing - principally China, where exports in infrastructure that can accommodate have been boosted by the 2008 Free Trade “big ships” including dredging, terminal deal - are creating strong demand for New infrastructure, inland ports and intermodal Zealand’s dairy products. Once implemented, freight hubs. CPTPP is expected to open up the dairy market in dry and tropical countries which are The global trend for containerisation is evident unable to produce the amount of milk they across New Zealand’s ports. By HY18, consume. KiwiRail’s growth in port revenue was up 16% on the prior year’s six months to December Significant growth in the forestry sector is 2017. In the same period overall container forecast in the short and long term. In the first movements for New Zealand grew by 7%, six months of FY18, increased log volumes reflecting the modal conversion to rail. resulted in an 8% revenue upsurge in forestry

Key Sector Locations

Ports

Inland Ports / Freight Hubs

Coal

Major Forestry

Major Dairy / Meat / Manufacturing Plants

Earthquake Recovery and between Christchurch and Picton. It also resulted in loss of earnings of around $100 ongoing resilience million from business disruption and costs associated with recovery and resilience work. The 7.8 Kaikoura earthquake in 2016, caused widespread damage to the Main North Line, Following the earthquake, KiwiRail partnered creating 750 separate worksites, more than 90 with the New Zealand Transport Agency in slips and landslides and damage to 21 bridges the North Canterbury Transport Infrastructure

4. https://www.letstalkaboutcoal.co.nz/coal-globally/ 5. https://www.bp.com/content/dam/bp/pdf/energy-economics/energy-outlook-2017/bp-energy-outlook-2017.pdf

8 | Statement of Corporate Intent 2019-2021 Recovery (NCTIR) alliance to rebuild the line, KiwiRail continues to work closely with insurers reopening for limited freight services just 10 to resolve its earthquake claim, and has months after the devastating earthquake. The received progress payments totalling $100 early reopening took trucks off the vulnerable million to date. inland routes and helped with the rebuild of the road, including the delivery of concrete blocks In the years ahead, KiwiRail plans to address for sea walls along the route. resilience weaknesses in the Cook Strait Ferry Services link which were highlighted during the Following this significant achievement, Kaikoura quake. KiwiRail is working closely however, severe weather events disrupted with ports to develop resilient land and sea- services on the line, creating uncertainty for side infrastructure in Wellington and Picton, domestic freight customers. This resulted in and is considering multi-user ferry terminals in some freight moving to road and sea. Wellington and Picton as planning to enhance the Cook Strait’s resilience continues. In FY19, work will continue to bring full freight services back with the reliability customers To strengthen the resilience of its operations, require to commit volume. This will be a key KiwiRail is developing a train control centre in priority for KiwiRail, completing permanent Auckland to ensure freight and passengers can works along the line and relocating the track keep moving safely if an earthquake affects to provide greater network resilience. A return Wellington. to full freight services and the resumption of the Coastal Pacific passenger service are expected to occur in the second half of 2018 but are dependent on seismic activity and weather events in the area.

Our Strategic Priorities

For three years, KiwiRail has worked to KiwiRail’s vision is to become the leading simplify its business, standardise its assets and safety and health organisation in New Zealand invest in its people. This has resulted in the in practice and performance. To achieve delivery of reliable operational freight services, this, it is vital that Zero Harm is at the core of world-class tourism experiences and improved the business and that KiwiRail’s employees financial results, meeting the commitment of and contractors believe every accident is the business to Government for the past three preventable. years. Every year, KiwiRail delivers targeted initiatives To create the blueprint for the next five years to enhance the safety of its employees and of growth, KiwiRail has assembled a cross- worksites across the country. Core to the functional strategy team spanning business delivery of these initiatives are policies and units and levels in the organisation. It is crucial procedures to provide clear leadership, that the blueprint is founded in the delivery expectations, targets and performance of outstanding customer service through monitoring. This continued improvement engaged and committed employees. The team resulted in a 6% decrease in Total Recordable is engaging with customers, their customers Injuries in the first six months of FY18. and industry change agents to understand the needs of the freight market into the future. The Health and Safety Action Teams, Critical outcome of this work will be a five year plan Risks and Safety Management System of service and cultural reforms for customer growth. In the FY19 - FY21 period, KiwiRail will continue to invest in people, safety initiatives and systems to develop procedures and Sustaining a Zero Harm initiatives to improve worksite health and environment safety. Training to improve safety capabilities, which encourage a proactive approach to Ensuring people can access the rail network personal safety and the safety of others, will safely and that KiwiRail’s workplaces are safe also continue through programmes such as is essential to the on-going success of the Just and Fair Culture training and local Health business. and Safety Action Teams.

Statement of Corporate Intent 2019-2021 | 9 The pillars of a Zero Harm culture

EVERYONE EVERYONE WE HAVE WE BELIEVE EVERY OUR PROACTIVELY TRULY A MATURE EVERY PERSON IS COMMITMENT CONSIDERS BELIEVES MODERN ACCIDENT IS A SAFETY TO SAFETY IS SAFETY RISK SAFETY IS RISK-BASED PREVENTABLE LEADER RELENTLESS WHEN MAKING GOOD FOR SAFETY DECISIONS BUSINESS CULTURE

WE ARE THE LEADING SAFETY AND HEALTH ORGANISATION IN NEW ZEALAND IN PRACTICE AND PERFORMANCE

In the next three years, KiwiRail will refresh Sustainability its current safety, health and environment KiwiRail continues to build on rail’s advantage management system with a new framework as a naturally efficient mode of transport, to that provides a consistent way of improve its environmental accountability. For understanding and managing Zero Harm. every tonne of freight moved by rail there is The new system is based on international a 66% carbon emission saving over road. In standards and best practice which clearly addition, EY’s Value of Rail report released in show who is accountable and responsible 2017, found that New Zealand’s rail services for system development, management and reduce carbon emissions by 488,000 tonnes use. The programme will further enhance a year, the equivalent of taking 87,000 cars safety leadership and employee engagement off the road7. These are important statistics to throughout the organisation, through initiatives consider when reviewing the role rail plays in such as Safe Work Conversations. supporting New Zealand’s commitment to the Paris Accord, which aims to reduce emissions KiwiRail has identified five Critical Risk below 2005 levels by 30% by 20308. Networks as organisational safety focus areas. These are track occupancy, Signals KiwiRail recognises its role in supporting New Passed at Danger (SPAD), tunnels, level Zealand as the country progresses the global crossings and contractor management. In the sustainable development agenda. To further FY19 - FY21 period, KiwiRail will continue to support the agenda, KiwiRail has identified work with experts across the business to find a subset of the United Nations’ Sustainable risk controls that reduce the business’ risk Development Goals (SDGs) to integrate in its exposure. organisational strategy and work programme over the next three years. SDGs provide KiwiRail continues to implement leading an integrated framework for addressing the technology solutions. In FY19, KiwiRail world’s most urgent social, environmental and will work with geotech experts and Victoria economic challenges. University to undertake a 12-month trial that will test a new GPS monitoring system that The SDGs identified by KiwiRail will have the gives advanced warning of landslides along most impact on the business in the short to the rail network. medium term and will address climate change

7. http://www.kiwirail.co.nz/index.php?mact=News,cntnt01,detail,0&cntnt01articleid=506&cntnt01returnid=101 8. http://www.mfe.govt.nz/climate-change/why-climate-change-matters/global-response/paris-agreement

10 | Statement of Corporate Intent 2019-2021 and Industry, Innovation and Infrastructure. In In the FY19 - FY21 period, KiwiRail will continue the next few months KiwiRail will undertake to work closely with port partners to move large work to validate SDG priorities with key volumes of freight at speed and connect New stakeholders. Zealand businesses to export markets. KiwiRail is ideally placed to deliver logs as the “Wall of In FY19, KiwiRail will continue to progress its Wood” comes on stream, and is working with sustainability programme with further initiatives forestry operators and ports to enable rail hubs in sustainable procurement. in appropriate locations. KiwiRail’s log wagon fleet has grown by 40% since 2011, with former A key component of the sustainability container wagons being ‘recycled’ at the end of programme is KiwiRail’s collaboration with the their lives into wagons for forestry. Energy Efficiency and Conservation Authority (EECA) which is progressing the business’ Regional development efficiency programmes and targets across rail and sea. KiwiRail’s ground-breaking fuel The Labour-led Government has signalled its efficiency programme, DAS (Driver Advisory strong support for rail as an enabler of regional System) saved the business 5.7 million litres growth and has funded a number of projects of fuel in FY17. In the next 12 months, KiwiRail through its Provincial Growth Fund (PGF). will investigate the use of DAS on passenger There are opportunities to establish new rail- services and the installation of a similar fuel enabled Regional Economic Zones for forestry, efficiency programme on the Interislander dairy and other customers with the Fund ferries in partnership with EECA. providing for three feasibility studies at Taranaki, All areas of the organisation will work to meet Southland and Kawerau. KiwiRail will work KiwiRail’s 73.5 gigawatt hours (GWh) energy closely with customers, local government and saving target by 2020, an increase on the other stakeholders to plan the optimal freight initial 20 GWh target which was reached just transport system for these areas. eight months after the agreement was made in PGF funding of $5 million will enable the November 2016. reinstatement of the Napier to Wairoa line for forestry products, taking up to 5,700 trucks a Engaging our customers year off the road and growing a regional hub in Wairoa for the handling of logs. Funding and stakeholders - customer of $3 million has been allocated to upgrade strategy the Whanganui-Castlecliff rail line to allow mainline locomotives to support customers, KiwiRail partners closely with customers to drive including Open Country Dairy and Wellington’s a competitive, commercially-focused business CentrePort. which supports New Zealand’s sustainable and inclusive growth through reduced supply chain All projects aim to reduce carbon emissions, costs and by contributing to regional economies. create an easy flow for the export and domestic markets and improve road safety by easing In FY18, the business began to reshape congestion. All these things support New its domestic market offering. This work will Zealand’s growing economy. continue into FY19 with new commercial agreements implemented on key corridors, Tourism including Auckland to Christchurch, to ensure The Ministry of Business, Innovation and the business receives a fair return for its Employment’s tourism forecasts show annual services while remaining a competitive option international visitor expenditure increasing compared with road. 52.1% to $15.3 billion by 20239. In the next three years, “The Great Journeys of New Zealand”, In recent years, KiwiRail has experienced the umbrella brand covering KiwiRail’s strong growth in the import/export sector. Rail’s passenger rail and ferry services, will continue ability to aggregate and move large volumes of to leverage its position as an operator to freight with speed, has resulted in successful remote tourism locations and to boost regional partnerships with ports. In the FY18 HY result, economies through its connected journey port revenue grew 16%, well above average strategy. It will also target emerging tourism port growth of 8%. markets, including Japan and China.

9. http://www.mbie.govt.nz/info-services/sectors-industries/tourism/tourism-research-data/international-tourism-forecasts/documents-image-library/fore- casts-2017-report-final.pdf

Statement of Corporate Intent 2019-2021 | 11 Developing operational KiwiRail has formed Project NEXUS to evaluate smart rolling stock assets and performance emerging technologies to better the business’ diagnostics, operational performance and For KiwiRail to remain competitive against maintenance processes. These, in turn, boost road freight forwarders it must maintain its end-to-end delivery times, improving customer customers’ confidence. The most effective experience. The project will investigate super way to achieve this outcome is to provide maintenance depots in key locations and will customers with a consistent and reliable rejuvenate facilities and rolling stock to better service. the reliability of services. On Time Performance Integrated planning Achieving operational performance through KiwiRail is transitioning to a vertically asset reliability and On Time Performance is integrated operating model that is customer- key for customers deciding to put freight on to centric, service-led and primed for growth. The rail. However, KiwiRail’s progress in this area first step in this process has been to develop is hindered by decades of under investment a model that will provide a single approach to which resulted in deferred maintenance and KiwiRail’s asset planning, availability, reliability, infrastructure investment, ageing rolling stock, operational safety and people development mothballed lines and slower rail services. across the business. As the first step in this Ultimately, this reduces rail’s competitiveness process, KiwiRail’s executive team has been against road. restructured to bring the Network Services, KiwiRail is working closely with the Labour- Rolling Stock and Operations business units led Government on achieving long-term, under a single Chief Operations Officer to appropriate funding which will offer greater ensure a complete organisation-wide focus capacity for customers through investments on integrated planning for the benefit of in the rail network, new rolling stock and customers. smart technology. KiwiRail is transitioning to Inter-island Resilient Connection Project a service-led operating model to ensure that these future investments successfully meet (iRex) customers’ needs. The Inter-island Resilient Connection Project will define KiwiRail’s long-term ferry fleet Rolling stock reliability strategy (Project strategy. Work is underway to assess future Nexus) market demands, trends and customer KiwiRail’s rolling stock capital requirements requirements to determine the number of ships can no longer be deferred as many assets are KiwiRail should operate, the size of those ships at the end of their useful lives. For instance, and their capabilities for the next 30 years. the average age of a locomotive in the The project will ensure KiwiRail meets future South Island fleet is 46 years old. Extending requirements, capacity demands and that it maintenance on assets of this age requires provides resilient land infrastructure to support a greater number of inspections, and the continuity of service for customers in a seismic locomotives experience a greater rate of failure event. Work will continue throughout FY18 on impacting on KiwiRail’s customer promise. the future direction of the Interislander fleet. Typically, the useful life of a locomotive is 30 Digital years. If technological disruptions in KiwiRail’s KiwiRail’s Asset Renewal Plan for rolling stock business are not addressed efficiency gains aims to address the effects of underinvestment will slow, improvements to the reliability of by establishing long-term fleet requirements assets will stall, and rail will be outpriced by that will increase the availability and reliability road and shipping logistic companies which of its services, while maximising efficiencies adopted emerging technologies. and returns. Maintaining or improving the current 91% On Time Performance KiwiRail is investigating global best practice average for rail freight customers will require and opportunities to enhance the customer investment in new assets, overhauling experience through an intelligent transport existing assets to prolong their working life, network that provides deeper insights into and decommissioning assets at the end of KiwiRail’s operations and customers’ needs. their useful life. Over the next three years, This includes smart data options that monitor KiwiRail’s priority is the renewal plan and to the health of rolling stock and provide live- obtain Government support for an investment tracking of goods for customers. programme to reduce the average age of KiwiRail’s locomotives, from 30 years to 15 Property years by 2030. KiwiRail manages one of the country’s largest landholdings. In the next three

12 | Statement of Corporate Intent 2019-2021 years, the business will continue to drive Programme will continue into FY19, with a commercial outcomes from lease and license second class scheduled for enrolment in July arrangements across its property portfolio. 2018. The business will also continue to secure and protect the active rail portfolio through acquisition or disposal of land where this will Meeting financial targets improve the network and remove safety risk for current or future rail. As a State-Owned Enterprise, KiwiRail operates as a profit-oriented entity with In FY19, KiwiRail will continue to work with shareholder support required for below-rail operational staff to undertake site master infrastructure including tracks, bridges and planning to define a future focused operational tunnels. footprint to improve its operational yards. Investigations into new leasing opportunities KiwiRail has met its shareholders’ expectations will also be undertaken to support growing for the past three years and is on track to industries and regional growth. meet its full year operating surplus of $30-$50 million in FY18. KiwiRail is on track to deliver efficiency and productivity savings of $7 million Empowering our people in FY18, building on savings of $45 million in the past two years. Frontline engagement is fundamental to the success of KiwiRail’s business. The High Productivity and efficiency measures Performance High Engagement programme In the next 12 months, KiwiRail will drive (HPHE), which commenced in 2015, continues further productivity improvements that centre to transform KiwiRail’s operations. A joint on improving labour efficiencies through project with KiwiRail’s union partners, HPHE HPHE, workforce planning, decreasing empowers frontline staff to find solutions to the material spend, and consolidating rolling challenges facing the business while raising stock. In the FY19 - FY21 period, KiwiRail productivity, improving safety, and enhancing will continue its focus on delivering its targets performance. in line with the expectations of Shareholding Ministers. In the FY19 – FY21 period, KiwiRail will continue to align with unions on strategic Rail Review priorities to drive productivity and efficiency In Budget 2017, the then government gains. In the next 12 months, HPHE projects committed to a Rail Review to assess to address train optimisation and mechanical KiwiRail’s operating structure and long-term workforce development will be implemented; capital requirements. KiwiRail welcomes the delegates and managers will continue to Review and believes it is an opportunity to receive HPHE training and KiwiRail will begin highlight rail’s role in an integrated transport to roll out HPHE 2.0. The second stage of the system and to examine the wider benefits of programme will equip managers with the skills transporting freight by rail. required to implement site-specific processes that will further boost productivity and safety. KiwiRail believes it is critical to resolve the Workforce development matter of long-term funding so the business can best deliver on the Government’s KiwiRail’s learning programmes identify objectives for rail. This funding model impacts key areas of development, enabling staff to on KiwiRail’s ability to make cost-effective improve their performance and to expand on choices, or to plan, procure and operate its their current skill set. Leadership development services with an efficiency that can support programmes, such as the literacy and strategic partnerships. Multi-year funding numeracy course Back to Basics, will continue would also enable the business to provide throughout FY19 - FY21. In the next 12 a sustainable future for rail as a freight months, e-learning platform KiwiRail Learning transporter that delivers for customers, through Exchange (KLE) will be developed to further overdue capital investment in rolling stock for support employees and contractors. freight and tourism ventures and upgrades for maintenance facilities, ships and Cook Strait KiwiRail remains committed to being an terminal assets. inclusive workplace that attracts and retains a diverse workforce. In FY19, KiwiRail’s As the Rail Review progresses in FY19, Diversity and Workforce Planning Committee KiwiRail will continue to work closely with will establish initiatives to lift the profile and the Ministry of Transport, Treasury and the number of women in the workplace, while New Zealand Transport Agency to ensure rail its mentoring programme, due for delivery in remains an integral part of the solution to New 2018, will offer guidance to younger members Zealand’s transport needs. of KiwiRail’s workforce. The Graduate

Statement of Corporate Intent 2019-2021 | 13 How KiwiRail creates value

Providing Growing a resilience highly-engaged, to the NZ safe and transport Our productive Supporting network inputs: workforce customers to grow NZ’s economy

Financial

Our vision:

People TRUSTED KIWI-OWNED LOGISTICSGROWING PARTNER NZ

Assets We move people and freight Skills & know-how Our strategy:

Relationships Simplify

Standardise Environment Invest

14 | Statement of Corporate Intent 2019-2021 Delivering world class Providing a tourism sustainable Our experiences Facilitating transport outcomes: efficient alternative flows to/ and reducing from ports emissions*

Connecting people and places by enabling commuter journeys Reliable

Sustainable We move people and freight Valuable Our values:

*Around 16% of all total freight task carried, under 1% of all transport emissions

Statement of Corporate Intent 2019-2021 | 15 Aspirations and objectives

The upcoming Review of Rail is critical to With appropriate funding mechanisms in resolve the matter of long-term funding to place, KiwiRail will be well positioned to drive ensure a sustainable future for rail delivering economic growth in cities and regions, reduce services to customers for the benefit of New carbon emissions and support sustainable and Zealand. A commitment to a longer-term inclusive growth by moving people and freight sustainable funding model would recognise on rail. KiwiRail’s strategic role in the future of integrated transport, and provide greater For the following metrics to work effectively certainty for staff and customers to support KiwiRail requires its minimum capital budget effective strategic partnerships and enable and the implementation of a multi-year funding cost-efficient planning. model.

Objective: • Sustaining a Zero Harm Environment

Aspiration: • To be the leading safety and health organisation in New Zealand in practice and performance • Improve Zero Harm performance to Australasian best-practice levels • Provide consistent risk based Health and Safety standards • Ensure KiwiRail is recognised as a sustainability leader

Our FY19 - FY21 focus: • Build on risk-based systems and worker participation to deliver a step change for Health and Safety performance • Reduction in Total Recordable Injuries • Meet EECA’s 73.5 gigawatt hours (GWh) energy saving target by 2020

2018 2019 2020 2021 Sustaining a Zero Harm Environment Forecast Plan Plan Plan 1 per person /per 1 per person /per 1 per person /per - Safe Work Conversation month month month Total Recordable Injuries 140 105 79 59 SPAD As 23 16 10 7 Safe Working Irregularities 291 203 142 100 Derailments - Mainline 5 5 5 5 Derailments - Terminal 83 62 46 35 GHG emissions per NTK (gms) 26.19 25.92 25.66 25.41 Truck Avoidance (m) 1.1 1.2 1.2 1.3

16 | Statement of Corporate Intent 2019-2021 Objective: • Meeting our financial targets

Aspiration: • Long-term funding mechanism and sustainable operating model in in place • Improve operating surplus as a percentage of revenue to EBITDA 15%

Our FY19 - FY21 focus: • Improve operating surplus as a percentage of revenue to more than 15% • Maximise capital efficiency

2018 2019 2020 2021 Meeting our financial targets Forecast Plan Plan Plan Operating Surplus ($m) 40-60 55-75 80-100 95-115 Operating Margin (%) 7-10 9-12 12-15 13-16 Capital Expenditure - net of grants ($m) 273 298 375 393 Property Weighted Average Lease Term (WALT %) 4 4 5 6 Yield (%) 6 7 7 7

*Forecasts for the FY19-21 period are influenced by the challenging circumstances we face as a result of the November 2016 earthquake.

The revenue forecast over the FY19-21 period reflects the continued uncertainty KiwiRail faces in the Domestic market and the Interislander and Coastal Pacific passenger market as the business recovers from this significant event.A key assumption for FY19 is the Main North Line remains open but continues to operate under restrictions and the Coastal Pacific will return to service.

Given the fixed nature of KiwiRail’s cost base, any domestic revenue lost will have a significant impact on its EBITDA. These uncertainties are reflected in the forecasts, resulting in lower estimated revenue over the SCI period.

For KiwiRail to best deliver on Government objectives for rail, multi-year funding certainty is critical to support effective strategic partnerships and to enable cost-efficient planning.

Statement of Corporate Intent 2019-2021 | 17 Objective: Aspiration: • Empowering our people • Best in class staff engagement measures • Highly Engaged and Productive Team

Our FY19 - FY21 focus: • Address challenges of attracting and retaining talent in a competitive market, given KiwiRail’s ageing workforce • Ensure the organisation has the right people with the right skills, in the right place at the right time • Transition to a more diverse workforce to meet the requirements of the business environment

2018 2019 2020 2021 Empowering our people Forecast Plan Plan Plan Employee Net Promoter Score 0 5 10 12

Objective: • Engaging our customers and stakeholders

Aspiration: • Sustainable and inclusive customer growth • Align Shareholder and the New Zealand public on KiwiRail’s purpose • Ensure the Value of Rail is well understood by customers and the New Zealand public

Our FY19 - FY21 focus: • Develop customer insights to identify organisational strengths and develop competitive opportunities for future growth • Increase the capacity and resilience of the Cook Strait Ferry Services • Ensure digital strategy is aligned to support business growth strategy • Assist the Government initiative of lifting levels of productivity within regional communities • Work with stakeholders to ensure the Rail Review delivers a successful outcome for New Zealand

2018 2019 2020 2021 Engaging our customers and stakeholders Forecast Plan Plan Plan Revenue ($m) 594-614 640-660 670-690 689-709 Freight trading growth (%) (2)-1 8-10 8-10 3-5 GTK (m) 7,651 8,295 8,933 9,091 Revenue as a percentage of FTE 18 19 19 20 Revenue as a percentage of NTK 15 15 15 16 Revenue as a percentage of KM of track 18 18 19 20 Passenger trading growth (%) 9 8 3 2 Property revenue growth (%) 6 4 5 5

18 | Statement of Corporate Intent 2019-2021 Objective: • Delivering operational performance

Aspiration: • Efficient, reliable and integrated rail operations • On Time Performance above 90% • Total cost of operations less than 85% of revenue

Our FY19 - FY21 focus: • Optimise assets through standardisation and investment • Invest in network facilities and rolling stock to enable efficient and reliable services • Alignment with unions on strategic priorities to drive productivity / efficiencies • Integrated long-term train planning to ensure the organisation is able to drive productivity and efficiencies through the planning of people, locomotives and wagons

2018 2019 2020 2021 On Time Performance (%) Forecast Plan Plan Plan - Freight Trains - Premium 87 90 92 93 - % Interislander services to advertised sailings 99 99 99 99 Operating Costs Operating costs as a percentage of revenue 90-93 88-91 85-88 84-87 Total staff costs as a percentage of operating costs 50 47 48 48 Operating costs as a percentage of NTK 14 14 13 13 Network Renewals - New sleepers laid (000)* 64 81 65 75 - New rail laid (km)* 20 29 20 30 - New turnouts* 37 30 35 35 Availability of all locomotives (%) 91 92 92 92 Wagon availability (%) 89 92 95 95 Total Capital Expenditure as a percentage of revenue* 45 46 55 56 Total Capital Expenditure as a percentage of NTK* 7 7 9 9 Total Capital Expenditure as a percentage of KM of track* 8 8 11 11

* Excludes South Island MNL rebuild and Provincial Growth Fund Project

Statement of Corporate Intent 2019-2021 | 19 Required information

2018 2019 2020 2021

Forecast Plan Plan Plan

Shareholder Return Measures

Total Shareholder Return n/a n/a n/a n/a

Dividend Yield Nil Nil Nil Nil

Dividend Pay-out Nil Nil Nil Nil

Return on Average Equity (%) (73) (49) (29) (25)

Profitability/Efficiency Measures

Return on Average Capital Employed (%) (49) (34) (20) (18)

Operating Margin (%) 7-10 9-12 12-15 13-16

Leverage/Solvency Measures Shareholder’s Funds to Total Assets (%) (closing 55 56 60 64 equity/total assets) Gearing Ratio (net) (%)(net debt/closing equity) 38 29 23 17

Interest Cover (operating surplus/net finance costs) 3.6 4.5 6.3 7.2

Solvency (current assets/current liabilities) 0.69 1.08 0.98 1.00

Note that to provide meaningful comparatives, the above ratios assume that additional funding will be received as equity

Accounting Policies • Continuous Disclosure reporting as required KiwiRail’s detailed accounting policies can be By Treasury’s Commercial Operations Team found here: • Regular reporting to Treasury’s Commercial http://www.kiwirail.co.nz/media/publications Operations Team for performance monitoring during the Strategic Plan Dividend Policy investment period KiwiRail is focused on improving financial • Other information requested by Ministers in sustainability and reducing the need for accordance with section 18 of the State- taxpayer support. However, a significant Owned Enterprises Act 1986. amount of investment will be required from the Shareholder for the foreseeable future. As Significance such, KiwiRail does not expect to make any KiwiRail will consult with its Shareholding dividend payments over the period of this SCI. Ministers on matters that would have a material Information to be provided to effect on the scale, scope, financial return or Shareholding Ministers risk the activities of the Corporation, including: • Any substantial expansion of activities of KiwiRail will provide to Shareholding Ministers: those described in this statement • An Annual Report and Half Yearly Report • Any substantial capital (or equity) in accordance with sections 15 and 16 of investment, and the State- Owned Enterprises Act 1986. These will include a statement of financial • Any other significant transactions. performance, a statement of financial position, a statement of cash flows and Procedures for share acquisition such details as are necessary to permit an KiwiRail will consult with Shareholding informed assessment of the Company’s Ministers on the subscription for, or sale of, performance

20 | Statement of Corporate Intent 2019-2021 shares in any company or equity interests in KiwiRail Group as at 30 June 2018. any other organisation which are material, involve a significant overseas equity There has been an increase in the commercial investment, or are outside the scope of value related to operating free cash flows of KiwiRail’s core business. $4m. This reflects an increase in operating surplus as KiwiRail continues to recover from Compensation from the Crown the November 2016 Kaikoura earthquake with KiwiRail expects to receive compensation from improved financial projections as a result of the Crown as per section 7 of the State Owned higher revenue growth compared with previous Enterprises Act 1986 for public policy work and years. projects undertaken by the company which have Based on the current earnings projections, it is a public good element or purpose and would not not expected that the Group will be tax paying be undertaken on purely commercial grounds. in the projected earnings period. The present Commercial Valuation of the Crown’s value of tax payable on ungeared earnings is, therefore, zero. investment The Board have used the method of discounted cash flows (DCF) to estimate the value of the

$m 30 June 2018 30 June 2019

Present Value of Pre-Tax Free Cash Flows (1,593) (1,589)

Less Present Value of Tax Payable on Ungeared Earnings 0 0

DCF Enterprise Value (1,593) (1,589)

Less Net Debt (192) (208)

DCF Equity Value (1,785) (1,797)

The key points about the manner in which this the valuable externalities which rail provides. valuation was derived are as follows: These externalities were considered in EY’s • The DCF methodology used to calculate 2016 Value of Rail report. The approach taken the Net Present Value (NPV) of the entire in assessing the value of rail was to model the KiwiRail Group includes all subsidiaries on effects on the road network if there was no rail an after tax basis network. • The DCF / NPV was based on the nominal The EY report estimated the total value of (i.e. inflation-adjusted) future cash flows rail to the New Zealand economy to be $1.47 set out in this SCI, with forward projections billion - $1.54 billion per annum from just four made through years 4 to 7 aligned to quantitative areas: KiwiRail’s capital requirements, and years • Reduced congestion 8 to 20 consistent with the Commercial • Reduced greenhouse gas emissions Review undertaken in 2014 • Improved safety outcomes – reduced costs • A terminal value of zero has been assessed of safety incidents like death and injuries • A risk free rate of 4.5%* and discount rate • Reduced road maintenance and upgrades of 9% has been used (same as the 30 June 2017 valuation) The value excludes further qualitative benefits • PwC has confirmed the mathematical from rail, such as connectivity, land use and accuracy of the calculation of the DCF resilience benefits which would significantly valuation prior to approval of the DCF increase the value of rail. value by the Board On this analysis the value of rail is highly likely to far exceed the annual direct government The Value of Rail to Aotearoa investment in the existing network. It is important to note that the commercial valuation indicated above does not reflect

* Risk free rate used is consistent with PwC approach to take a series of longer-term forward one year yields

Statement of Corporate Intent 2019-2021 | 21 Appendix 1: Performance Measure definitions & glossary

Definitions of SOE Performance measures

Proportion of net operating cash flows paid out as a dividend to the shareholder Dividend Payout after allowance is made for capital maintenance

Dividend Yield The cash returned to the shareholder as a proportion of the value of the company

Gearing ratio (net) Net Debt divided by Total Equity

Interest cover Operating Surplus divided by net Interest Expense on Borrowings

Operating Margin Operating surplus divided by Total Revenue

EBIT divided by Total Average Equity before Revaluation Reserve and Interest Return on Average Capital Employed bearing liabilities

Return on Average Equity NPAT divided by Total Average Equity before Cashflow Hedge Reserve

Shareholder’s Funds to Total Assets Total Equity divided by Total Assets

Solvency Current Assets divided by Current Liabilities

Commercial Value less Commercial Value plus dividends paid less equity injected Total Shareholder Return divided by Commercial Value

22 | Statement of Corporate Intent 2019-2021 Glossary

EBIT Earnings before interest and tax

GHG Greenhouse Gas

GTK Gross Tonne Kilometre

De-stressing rail is a process undertaken to minimise the risk of the rail line buckling in hot Line de-stressing conditions

Net Promoter Score (NPS) derives from asking your employees or customers ‘How likely are you to recommend ‘company name’ to a friend or colleague?’ and basing that on a scale of 0-10. Scores Net Promoter Score of 9 or 10 are classed as promoters, scores of 7 or 8 are classed as passive, and scores of 0 to 6 are classed as detractors. The NPS is then calculated by subtracting the percentage of “Detractors” from the percentage of “Promoters” providing a score between -100 and 100

NPAT Net profit after tax

NTK Net Freight Tonne Kilometre

Net surplus (revenue minus expenditure) excluding significant items before foreign exchange, Operating Surplus interest, taxation, depreciation, amortisation, impairment, grant income and fair value adjustments.

Signal Passed At Danger - A category "A" SPAD is a SPAD where a stop signal indication (and any SPAD A associated preceding cautionary indications) was displayed correctly, in sufficient time for the train to be stopped safety at the signal

Total Recordable Injury Frequency Rate. A recordable injury is defined as a lost-time injury, any injury requiring medical treatment, or any instance where an injury prevents a return to work on TRIFR normal duties for a period of one day/shift or more Total recordable injury frequency rates are the number of total recordable injuries within a given period relative to the total number of hours worked in the same period

Net surplus (revenue minus expenditure) excluding significant items before foreign exchange, Operating Surplus interest, taxation, depreciation, amortisation, impairment, grant income and fair value adjustments.

Signal passed at danger. A category "A" SPAD is a SPAD where a stop signal indication was SPAD A displayed correctly, in sufficient time for the train to be stopped safety at the signal.

Total Recordable Injury Frequency Rate. A recordable injury is defined as a lost-time injury, any injury requiring medical treatment, or any instance where an injury prevents a return to work on TRIFR normal duties for a period of one day/shift or more. Total recordable injury frequency rates are the number of total recordable injuries within a given period relative to the total number of hours worked in the same period

Statement of Corporate Intent 2019-2021 | 23